Saturday, December 29, 2012

The Fiscal Cliff is more like Fiscal Quicksand

The United States government is nearly $17 trillion in the hole. It's an unimaginably large number. Years ago people predicted disaster if we went over $6 trillion, then $10 trillion. The train wreck never came. What's the limit of our debt? The fact is, there isn't any.

The Federal Reserve can literally create money at will. It's nothing more than a spreadsheet entry. Theoretically, they could create $17 trillion out of thin air and buy up the entirety of U.S. debt. What if the U.S. defaulted on its debt to the Fed? So what? The Fed can create money. They'll never go bankrupt. The government will never default though, because the Fed will provide all the money that's needed, even to borrow to pay the the Fed. It can even loan the government money at zero or negative interest rates.

At some point people will come to realize that the only restraint on the spending of the Federal government is the will of Congress. Congress has shown no signs that it's appetite for more spending is diminishing. When they talk about cuts, they're really talking about slowing down the rate of growth of spending, not actually reducing spending.

The consequence is not really government taking money from the private sector, it's the government directing resources, rather than the private sector. Once people figure out that the government is a source of unrestricted cash, lots of them will want to work for and sell things to the government. What's wrong with that? Well, it directs human activity to the most unproductive endeavors human kind has ever come up with.

In the old Soviet Union, people had savings. But what do you spend your money on when you walk into a shop and there are 25 of the same crappy suit you already own? Nobody's engaged in anything creative, new or exciting. That's not how government work rolls.

Cuba recently announced that unemployment hit a high of 3.8%. They have virtually no unemployment, because 80+ percent of adult workers work for the government and many adults just don't work, and aren't counted as members of the workforce. So even with great employment stats, the economy and quality of life are third world.

A thriving economy is not built on statistics. It's more than a measure of the cash in circulation. It's about incentives. People want to do exciting things in exchange for cash they can use to buy exciting things. If cash can be obtained by simply engaging and participating in some mundane make-work activity assigned by Uncle Sugar, there's no incentive to be extraordinary, and there's nothing extraordinary to buy, because nobody else has any reason to excel either.

This explains how you can have a mountain of debt, printing presses running at full tilt, and no inflation. The inflation doesn't come about until necessities become scarce. We're not there yet. But we're on our way.

Friday, December 7, 2012

Obamacare and the job market

With the re-election of Barack Obama and the Supreme Court decision that the individual mandate can stand as a tax, Obamacare is the law of the land, like it or not. It will be fully implemented in 2014. With all the uncertainty surrounding the law, one thing is certain; labor costs are going to go up. How will that effect the labor market? For clues, look at the housing market.

After the credit market debacle of 2008, new requirements were put in place for loans, making qualifying for a home mortgage much more difficult. Demand for housing is still there, but fewer people can qualify to buy a house. Hence the housing market, four years later, is still lackluster at best.

The same principals will apply to the labor market. In fact, anticipated cost increases have already had a major impact. The official unemployment rate for November actually dropped to 7.7% as the economy reportedly created 120,000 new jobs. However, the drop in the rate came from the fact that 350,000 people quit looking for work and are therefore no longer counted in the employment numbers. The percentage of working age adults participating in the workforce is now at a 50+ year low.

There are job openings out there, but the bar has been raised and is going to be raised further. Consider a company that operates on a 30% margin. That means that for every $1 they generate in revenue, they net a profit of 30 cents after expenses. If their current cost per employes is $20,000 per year, they have to take in an additional $66,000 in revenue per new employee to maintain that margin. Now increase the cost per employee by $5,000 per year to cover an insurance requirement. The company now has to generate over $83,000 per employee to justify a new hire. If you can't deliver that kind of productivity, they don't need you.

This may actually benefit companies at the top of their field as companies operating on tighter margins drop out. It could also benefit temporary employment services. More companies may opt for "just in time" labor, using them only when they really need them, rather than taking them on as employees. Again, look at the housing market. In our area, it now costs almost twice as much to rent a house as to it does to pay a monthly mortgage, but if you can't get the mortgage, you're going to have to rent. Your hourly cost to rent an employee may be substantially higher than taking one on permanently, but you can let them go or stop using them any time without consequence.

It may also cause an increase in independent contractors as individuals find it easier to get a little work from a lot of companies than to get a full time position with one company.

Obamacare will cause changes in more than just the labor market, but the labor market may be where most people experience change first. I'm not going to say the world will come to an end or that we're going to suddenly experience some kind of train wreck. After all, Greece, Portugal and Spain still exist, despite their economic woes. Life will go on, but it will likely be quite different. You can't regulate, mandate, tax and spend your way to a vibrant economy, but that's not what America voted for.

Saturday, December 1, 2012

The Fiscal Cliff: We've already gone over it

As Congress and the White House put up a front of frantically trying to put together a deal to avoid the so called "fiscal cliff" the punch line is, we  went over that cliff years ago, and the fleecing of the younger generations is already well underway.

I'd say the actual edge of the cliff occurred in late 2008 with the passage of TARP. We were in a situation where large banks, financial institutions and car companies were on the verge of failure. Had they been allowed to fail, perhaps we'd have been plunged into a depression; a depression we'd be out of by now. Yes, financial institutions and car companies would have gone under, and they'd have been replaced by new financial institutions and car companies. Instead, John McCain famously suspended his campaign to run to Washington D.C. and put a stop to the madness, then promptly embraced the madness.

Republicans and Democrats alike decided that preserving the comfort level of the older generation was paramount, even if that meant throwing younger generations under the bus, and under the bus is where the younger generation is now. By the way, the average age of members of Congress is 60.

Consider what has already been decided by both parties. Entitlement changes for anyone 55 or older, the generations that are actually responsible for our out of control debt, are out of the question. For future generations, raising the eligibility ages and reducing benefits are a foregone conclusion. They just need to work out the details.

Even with cuts to entitlements and tax hikes, there is no plan for actually achieving a balanced budget, never mind paying down the debt. The plan only calls for reducing the rate of growth of the debt a bit from what it's projected to be now. That means that in a few more years, we'll be looking at another fiscal crisis, but by that time, the folks working on today's deal will be comfortably retired.

A strong leader with a real plan has not emerged on the national stage because the environment isn't there for one at the moment. Why would someone put themselves into the political meat grinder knowing they'll be despised for pointing out the obvious and end up losing anyway?

The American public is not convinced that major short term pain is the right medicine. So, for the time being we will continue the descent over the cliff. Remember, it's not the fall the kills you. It's the sudden stop.